60-Second Explainer: How the Fed is Working to Lower Inflation

June 2, 2022

This first video in our 60-Second Explainer series provides a brief review of how higher interest rates can help bring inflation down. These videos aim to provide quick insights on economic conditions, monetary policy, and how the Fed is working for you. Stay tuned for additional videos in the months ahead.

Transcript

With inflation reaching a 40-year high, the price of basic goods and services has gone up, and the money in your pocket doesn’t stretch as far as it used to.

Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. (Federal Reserve Chair Jerome Powell, Press Conference, May 4, 2022)

To help lower inflation, the Federal Open Market Committee (FOMC) has started tightening monetary policy by incrementally raising the target range for the federal funds rate.

In other words, the Fed is raising interest rates.

Why is this important?

This increases short-term borrowing rates for commercial banks. The rate then gets passed down to consumers and businesses, raising interest payments for debt like auto loans, credit cards, business loans and mortgages. 

When it costs more to borrow, economic activity tends to slow down, both through reduced investment activity by businesses and reduced spending by consumers.

This reduction in overall demand can offset price pressures and bring inflation down.

With these actions, the FOMC is aiming for a policy path that will bring inflation back to its average 2% goal while keeping the labor market strong.

You may also be interested in:

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.